This document provides an overview of service tax on work contracts under Indian law. It defines what constitutes a work contract and declared services. A work contract is a single contract for material and labor to carry out works like construction, installation, etc. It discusses how work contracts are taxed, with the labor portion taxed under service tax and the goods portion taxed under VAT/Sales tax. There is a reverse charge mechanism for service tax on certain work contracts. The place of provision of service for work contracts is where the immovable property is located.

1. WORK CONTRACTS
A PRSENTATION BY
GYATI GUPTA
SERVICE TAX ON

3. What is a
service ?

4. An activity carried out
By one person for another
For consideration

5. Includes : Declared Services
Excludes:
- Sale/Deemed sale/Gift etc. Of
movable/Immovable property
- Transaction in money & Actionable Claim
- Employee Employer Relationships
- Court fee
- Services mentioned under Negative List

6. What are declared
service ?

7.  Specifies the list of Declared Services and
contains 9 Declared Services
 These include Renting of immovable
property, Construction services, IPR services,
Information Technology software, Right to
use, Hire Purchase, Works Contract, Catering,
and Agreeing to act or Not to act or
tolerance an act: forbearance.

8. Why was there a
need for declared
service ?

9.  The definition of service in the first instant is very
wide to cover any txn done for a consideration.
 However, there exists a few activities which would
overlap with the other levies of state with a marginal
difference , thereby questioning the constitutional
validity of the levy under service tax. Some of these
are specifically included as these are partly covered
under List II i.e. State List (like works contract, supply
of food, hire, financial lease, hire purchase)
 In some cases, there may be a doubt whether that
activity could possibly called a service at all
 To rest a doubt about the validity of a txn to
considered as service , the authority has intended to
declare such activities to be a service.

10. Work Contract is one
of the 9 declared
services

11. What is a Work
Contract ?

12. Defined by clause 2[ja]
inserted by The
Finance Act, 2005 in
the Central Sales-tax
Act, 1956

13. A contract for carrying out any work
which includes assembling,
construction, building, altering,
manufacturing, processing,
fabricating, erection,installation,
fitting out, improvement, repair or
commissioning of any movable or
immovable property

14. Simplified Version
(In a layman’s
language)

15. Work contract =
a single contract for
(Material + Labour )

16. Guidelines to
ascertain works
contract

17. • There must exist an INDIVISIBLE WORKS
CONTRACT; divisible contracts are outside
the scope.
• GOODS MUST BE INVOLOVED IN THE
EXECUTION OF THE WORKS ; transfer of
property in goods does qualify as works
contract when it is incorporated in the
works.

18.  Transfer of PROPERTY IN GOODS
MUST PASS as goods or in some
other form. Form of goods has no
relevance ; may have a relevance for
determination of rate of tax
 Some WORK HAS TO BE DONE ON
THE PROPERTY by the contractor.

19. • PURE LABOUR CONTRACTS OR SERVICE
CONTRACTS are outside the purview of the
sales tax/VAT law.
• If during the execution of works contract
GOODS ARE CONSUMED and their identity
is lost THEN NO TRANSFER OF PROPERTY
occurs in those goods.

20. Taxabilitiy of
work contract

21. Work
contract
Labour
(Service)
Service Tax
(Revenue of CG)
Material
(Goods)
VAT/
Sales Tax(Revenue
of SG)

22. Service Tax
Labour and
other
service
charges
incurred
VAT/ Sales
Tax
Value of goods
in which the
property
would pass
during
execution of
works contract

23. Sales Tax Liability

24. Taxable Turnover
 Tax Rates

25.  Cost of Acquisition of the goods xxxxx
 + Margin of profit on them prevalent
in the trade
xxxxx
 + Cost of transferring the property in
goods
xxxxx
 + All other expenses in relation there
to till the property in them passes
to the Contractee xxxxx

26. Tax
Rate
Value of each item of
material t/f in course
of execution of a
works contract
If identifiable :
Tax is charged on the
value of individual
items /materials
If not identifiable:
Tax is charged on
basis of specified
percentages
Composite Rate*
To be applied on the
entire contract value
of the works contract.

27. CENVAT CREDIT RULES, 2004
 The contractor is not entitled to avail of input tax
credit on INPUT/ CAPITAL GOODS procured from
within the state under composite scheme whereas the
same can be availed in the other two situations already
discussed.

28. Another Tax under State Vat Laws:
WORK CONTRACT TAX (WCT)
 W.C.T. Is also deducted under state vat law.
(Payment is made to the contractor after deducting
TDS (for VAT) under particular state VAT Laws @
Specified % (for eg. 4% in D-VAT) (Sec. 36A of D-VAT)

29. Service tax
liability

30. Requirements:
 Determination of value of service portion in the
execution of work contract
(As per Rule 2A of Valuation Rules)

31. Value of Service portion : Clause (i)
• Gross amount charged
for the work contract xxxx
Less: Value of property in goods
t/f in the execution of the
said work contract xxxx
xxxx

32. VALUE OF SERVICE PORTION (CLAUSE II)
a) Original Works :
Pay Service tax on 40% of the total amt charged for
the works contract.
b) For Maintenance or Repair or Reconditioning or
Restoration or Servicing of ANY GOODS
(MOVABLE PROPERTY ) :
Pay service tax on 70% of the total amt charged for
the works contract.

33. ....CONTD.
c) In case of other Works Contract, not covered under
sub-clauses (a) and (b) , incl. Maintenance ,repair,
completion and furnishing services such as glazing,
plastering,floor and wall tiling, installation of
electrical fittings of an immovable property:
Pay service tax on 60% of the total amt charged for
the works contract.

34. Direct Tax:
Concept of
TDS

35. TDS is deductible u/s 194c on total
value of contract.
(1% on individual/HUF)
(2% on companies, and others not
submitting the PAN )
Individual Contract Lt. : Rs. 30,000/-
Agg Contract Lt in a year: Rs. 75,000/-

36. Reverse Charge is also applicable in the
case of Service Tax NOT on entire WORK
CONTRACT
 Partial Reverse Charge Mechanism (50%,
50%) shall be applicable :
if Service Provider : any Individual / HUF /
Proprietory concern and
Service Receiver : Business Entity/
Registered Partnership Firm (L.L.P.) or a
Company

37. What would be the
provision of place
of service ?

39. The place of provision of services
provided directly in relation to an
immovable property, including services provided
in his regard by experts and estate agents, provision
of hotel accomodation by a hotel, inn, guest house,
club or campsite, by whatever name called, grant of
rights to use immovable property , services for
carrying out or co-ordination of construction work,
including architects or interior decoraters , shall be
the place where the immovable
property is located or intended to be
located.

40. What would be the
Point of Taxation
?

41. - Rule 3 of POT Rules, 2011 for Normal
Charge
- Rule 7 of POT Rules, 2011 for Reverse
Charge
- It is also a continous supply of service

42. Rule 3 :
a) On issue of invoice (where invoice is issued
within prescribed time : 30/45 days)
a) On completion of provision of service
(where invoice is not issued within
presribed time : 30/45 days)
b) On receipt of payment in a case where the
person providing the service receives the
payment before the time specified in clause
(a)

43. Rule 7 :
• Where the payment is made within a period
of 6 months of the date of invoice :
POT= the date on which payment is made
• Where the payment is not made within a
period of 6 months of the date of invoice :
POT = As per Rule 3

44. In case of continous supply of service
• POT shall be taken as the date of completion of each
such event as specified in the contract shall be deemed
to be the date of completion of provision of service.

45. Difference Between
Works Contract
and
Construction Contract

46. Basis Works Contract (Service) Construction Service
General Normally a single contract
for material and labour
There may be single
or mutilple contracts
for land , labour and
material.
CCR on
Inputs
Not Available under any
scheme
Total credit shall be
allowed under every
scheme.
Reverse
Charge
Mechanis
m
Applicable (50%, 50%) N.A.
Deemed
Sale
Goods t/f in execution of
works contract = Deemed
Sale & Liable to VAT.
No Deemed Sale, so
no question of VAT

47.  IDT- Service Tax book by CA Raj Kumar Sir
 IDT Study Manual by ICAI
 Online portals :
- www.caclubindia.com
- www.investopedia.com